Financial Review

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“2018 was another successful financial year, with revenue growth and operating profits up 11 per cent on 2017. The core business has grown in spite of the macroeconomic uncertainties and unfavourable movements in trading currencies.”

We successfully completed the acquisitions of ShireSystem, a computerised maintenance management software business extending our software portfolio further into the building lifecycle, and ActiveOnline a visualisation software business, complementary to our existing ESIGN business.

Funding of ShireSystem was secured by way of entering into a new term loan facility of £8m and raising a further £2.25m through a share placing to accelerate the acquisition and integration of ActiveOnline with our existing visualisation business ESIGN.

We have continued to convert a high proportion of cash from our operating profits into operating cash flow and at the year end we have shown a net debt position of £2.1m, following the £8m term loan.

Revenue

Revenue from continuing operations for the year increased 11 per cent to £22.2m (2017: £20.0m). Underlying revenue growth (excluding the impact of acquisitions and movements in foreign exchange rates) was 5 per cent. The acquisitions of ShireSystem and ActiveOnline in July 2018 and November 2018 respectively contributed a further 8 per cent, while the overall negative impact of a foreign exchange offset the underlying revenue growth by 2 per cent.

The overall revenue profile of the Group remains strong, with the proportion of revenue derived from recurring maintenance support and subscription revenue which increased to 57 per cent (2017: 55 per cent). The level of deferred income at the balance sheet date, measuring future maintenance revenue, increased by 18 per cent to £5.7m (2017: £4.8m).

Revenue growth was driven by direct sales with an increase of 12 per cent to £21.0m (2017: £18.8m). Sales through reseller channels grew by 4 per cent to £1.3m.

The Group delivered solid growth of 22 per cent in its core mature markets of the UK and Germany, which together comprise 53 per cent of total revenue. Scandinavian revenues were down by 6 per cent, driven by unfavourable foreign currency impact between Sterling and Krona. The Group’s strategy to penetrate new geographic markets was reflected in strong revenue growth in the USA, which grew 18 per cent to £0.8m, in the Rest of Europe, which grew 14 per cent to £2.5m and the Rest of World, which grew 34 per cent to £0.5m.

Profit

Gross profit is revenue less the direct cost of providing products and services to customers, principally the costs of training and consultancy staff.

Reported operating profit grew 11 per cent to £2.6m (2017: £2.4m).

The period includes costs of £0.7m in relation to the acquisition of ShireSystem and ActiveOnline. After excluding the impact of these costs, together with the impact of the non-cash amortisation of acquired intangible assets as set out below, adjusted operating profit for the Group increased by 41 per cent.

 

2018  2017
£’000 £’000
Operating profit 2,619 2,361
Acquisition expenses 689
Amortisation of acquired intangible assets 595 412
Adjusted operating profit 3,903 2,773

 

Software product development expenses amounted to £2.8m for the year (2017: £2.7m) of which £1.0m (2017: £1.1m) was capitalised demonstrating the commitment to investing increasingly in new product development and substantial product upgrades. The spend capitalised in the year includes investments in Memmo, Staircon Online Designer and Powerproject Vision all launched in the second half of 2018, and investment in Powerproject XV to be launched in 2019. The carrying value of these software assets together with the carrying value of software assets capitalised in previous periods was reviewed for impairment at the balance sheet date and no impairment was required.

Finance costs in the year, largely in respect of the Group’s term debt, totalled £0.2m (2017: £0.1m), resulting in a profit before tax of £2.4m (2017: £2.3m).

The Group tax charge in the year was £0.6m (2017: £0.4m) and represented 24.6 per cent of profit before tax (2017: 15.8 per cent). The increase in rate compared with 2017 reflects the disallowable nature of the acquisition related expenses.

The net profit attributable to Ordinary Shareholders decreased by 4 per cent to £1.8m (2017: £1.9m).

After adjusting for the post-tax effect of acquisition expense items and amortisation of acquired intangible assets adjusted net profit attributable to Ordinary Shareholders increased by 37 per cent to £3.0m (2017: £2.2m).

 

2018  2017
£’000 £’000
Net profit 1,829 1,897
Acquisition expenses 689
Amortisation of acquired intangible assets 482 291
Adjusted net profit 3,000 2,188

Cash Flows

Cash generated from operations increased to £4.5m (2017: £4.2m), reflecting the strong trading performance of the Group and continued focus on management of working capital. Overall working capital movements were favourable, contributing a net cash inflow of £0.4m (2017: £0.5m).

Capital expenditure on intangible assets, principally comprising the capitalisation of software product development costs of £1m, was £1.1m (2017: £1.2m), reflecting the increased focus on the development of new products and major product upgrades. Capital expenditure on property, plant and equipment was £0.1m (2017: £0.2m).

After deducting capital expenditure and acquisition related expenses, adjusted operating cash flow, as set out below, was £4.0m (2017: £2.8m), meaning that 101 per cent of adjusted operating profit (2017: 102 per cent) was converted into cash. This reflects the strength of the overall business model, where 57 per cent of the Group’s revenue is recurring and typically invoiced annually in advance, and the close focus on management of working capital.

 

2018  2017
£’000 £’000
Cash generated in operations 4,455 4,167
Purchase of intangible assets (1,064) (1,154)
Purchase of property, plant and equipment (123) (180)
Acquisition expenses 689
Adjusted operating cash flow 3,957 2,883

 

Free cash flow before dividends and acquisition related expenses increased by 24 per cent in the year to £3.3m (2017: £2.6m). Cash dividends paid to shareholders amounted to £0.2m (2017: £0.2m).

 

2018  2017
£’000 £’000
Adjusted operating cash flow 3,957 2,883
Net interest paid (151) (98)
Tax paid (618) (251)
Proceeds from disposals of property, plant & equipment 83 161
Adjusted free cash flow 3,271 2,645
Acquisition expenses (689)
Adjusted operating cash flow 2,582 2,645

Funding and Liquidity

The Group ended the year with a net debt of £2.1m (2017: net cash of £1.0m).

The Group’s net cash position comprises cash at hand of £6.0m (2017: £4.7m), offset in part by gross borrowings of £7.9m (2017: £3.4m) and obligations under finance leases of £0.3m (2017: £0.3m). Gross borrowings comprise a term debt of £7.6m from Barclays and a loan balance against the ActiveOnline property acquired of £0.3m. The £7.6m term debt taken out in July, replaced a previous loan balance of £2m. The loan is repayable in quarterly instalments over the next five years, with £1.6m annually. The term debt carries a fixed interest rate of 3.768 per cent over the next three years.

Security provided to the bank for the provision of these facilities is a cross guarantee and debenture between the parent company and certain UK subsidiary companies and a commitment of the shares of the operating companies.

Covenants have been made to the bank in respect of three elements: EBITDA to gross financing costs, EBITDA to gross borrowings and cash flow to debt service. These covenants are tested quarterly.

Earnings Per Share and Dividends

Basic earnings per share decreased 4 per cent to 2.4 pence (2017: 2.5 pence).

Adjusted basic EPS, adjusted for the impact of exceptional acquisition related expenses, amortisation of acquired intangible assets and for the associated tax impact, increased 34 per cent to 3.9 pence (2017: 2.9 pence).

The Board has recommended the payment of a final scrip dividend in respect of the year ended 31 December 2018 of 0.40 pence per share (2017 final dividend: 0.40 pence), with a cash alternative to be made available. This gives total dividends in respect of the financial year of 0.68 pence per share (2017: 0.60 pence), an increase of 13 per cent over 2017.

Ben Moralee
Group Finance Director
5 April 2019

Download the 2018 annual report

The Elecosoft annual accounts for the period ended 31st December 2018 are now available to download.

Shareholders can elect to receive hard copy shareholder documents at any time by informing Link Asset Services at The Registry, 34 Beckenham Rd, Kent, BR3 4TU.